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Should I move my investments to a new brokerage firm?

If you are considering the transfer of investments from one brokerage firm to another, you may want to consider many factors. The financial services industry has experienced a great deal of turmoil during the past several years.

One result of the near collapse of many of America’s financial institutions has been a change in the ownership, product offerings and sales distribution systems for many retail brokerage firms.

Alternatively, many brokerage firms are now offering telephone call center support as an additional option, or many cases the only option, for investors with less than $250,000 to invest. Read my post “Why Many Brokers & Advisors Neglect Their Clients” for more on this.

Retail brokerage firms sell investments to the public. Many banks and brokerage firms are consolidating by acquiring others in an attempt to reduce costs and grow their revenue. Two potential scenarios that could impact investors are

1) when a broker simply wants to leave their existing relationship with brokerage firm “A” for a position with a new brokerage firm “B” and asks his customers to move with him or

2) when brokerage firm “B” acquires another firm “A” but the broker doesn’t want to remain with the new firm “B” and therefore asks that investors move to a third brokerage firm “C” either before or after the acquisition of firm “A” by firm “B”. Don’t worry about the alphabet soup. Just know that these moves could cost you money.

CHANGE PUSHES BROKERS TO MOVE TO OTHER FIRMS

When these transactions occur, such as one brokerage firm buying or merging with another, or one bank purchasing a brokerage firm from another bank, the stage is set for a substantial re-shuffle of broker affiliations and provides an opportunity for investors to get lost, or even abused in the process.

When one firm purchases another, the new owners merge the distribution, sales, training, product offerings and policies and procedures of the acquired firm into those of the acquiring firm. In many cases this may significantly impact the compensation or operating parameters of the brokers from the acquired firm. This is where investors should take notice.

Brokers can transfer client investments from one firm to another with little regulatory burden other than administrative paperwork associated with transferring client accounts. However, the burden of moving clients from one firm to another can be substantial if a broker has a large number of customers.

Naturally, a broker will want to take their “book of business” with them to their new firm if they don’t like what the acquiring firm has to offer in the way of compensation and product offerings.

If an investor has a good relationship with their broker, and the broker has served the investor well in the past, then moving with them MIGHT make sense but an investor will still want to perform a cost-benefit analysis before transferring investments.

On the other hand, if an investor doesn’t have a good relationship with their broker, they may wish to really scrutinize the move before taking action.

An investor could, at best, be in for an administrative headache as they have to provide new signatures and provide documents to meet the new firms “Know Your Client” and other account opening requirements as well as proof of ownership documentation to structure ownership on the new accounts.

At worst, they may experience a financial or tax losses, or both, if investment losses are generated by redeeming investments that can’t be moved, or held, at the new firm.

Many firms may have proprietary products that cannot be held by other firms. Brokerage firm “A” may have it’s own mutual fund that Brokerage firm “B” (a competitor) won’t accept or hold in account. This requires the investor to redeem their shares of Firm “A’s” fund and reinvest the proceeds at firm “B”.

This may not be in the investor’s best financial interest when considering already paid front-end sales charges or potential back-end surrender charges. An investor could also potentially experience custodial fees for moving IRA accounts and possibly other losses and fees as well. After analyzing any potential cost an investor will need to determine if moving is worth it.

Staying with the existing firm and allowing a broker to move on may not impact an investor as much as you might think. This will depend on several things such as the relationship with the broker and the size of an investor’s portfolio, or how much they have invested with the broker’s firm.

If investors have less than $250,000 of investable assets and don’t have a wonderful history with their broker, then remaining with an existing firm and asking for a new broker may not be such a loss as the existing broker still may not provide stellar service even after moving customers to the new firm.

Alternatively, many brokerage firms are now offering telephone call center support as an additional option, or many cases the only option, for investors with less than $250,000 to invest. Read my post “Why Many Brokers & Advisors Neglect Their Clients” for more on this.

BROKERS WILL MAKE THE MOVE SOUND EASY FOR YOU

Many acquiring firms will provide administrative support to entice brokers to move to the firm, or remain at the firm if acquired. Broker’s may tell investors that the administrative staff will take care of all the paperwork and correspondence associated with the move and that there will be little required of the investor.

In some cases this may actually be true. However, investors should remember that the new firm will want to obtain copies of all required documents to open new accounts. Investors should also realize that they may be only one of several hundred other customers that are being asked to move from the old firm to the new one.

The potential for lost paperwork or mistakes such as mis-titled accounts should be considered. Investors should also closely track the balances transferred from the old firm to the new and expect that all their money may not move over at the same time.

Additionally, investors will need to track dividends and other miscellaneous cash to ensure that is all accounted for in the transaction. Investors should closely track this themselves and not rely on the broker or the broker’s administrative staff to ensure a successful transfer.

SWITCH LETTERS

Brokers are required to justify transactions that call for the replacement of one investment for another. In situations where an investor is being asked to sell or surrender an asset and turn the proceeds into cash for the purchase of another asset, or immediately invest in another asset without receiving cash, the broker must justify that the transaction is in the investor’s best interest. Within most retail brokerage firms this is recorded on a “switch” letter.

Mutual Fund Switches: Sometimes Only Your Broker Benefits
Selling the holdings of one mutual fund to buy shares of one or more different mutual funds may be appropriate under certain conditions. But some transfers between funds may constitute unsuitable switching, particularly if your broker recommends switching funds only to earn a commission from the sale or purchase. This kind of switch, in fact, is a violation of securities laws.
In addition to paying a commission to your broker for a switch, you can pay a price in other ways:

The switch letter should indicate the asset/investment being sold or surrendered as well as the asset/investment being purchased and all related costs/fees/charges. Some brokers will attempt to circumvent this requirement by simply asking the investor to surrender an investment at the old firm and leave the cash proceeds in the account (seen only as a redemption). Then when the new account is open and funded at the new firm, the broker asks the investor to invest those cash proceeds into another investment. The timing of the sale, account opening/funding and subsequent purchase of the new asset creates a potential loophole to the switch letter requirement. Many brokers may try to persuade investors that the funds/assets they have been invested in just haven’t been performing and a change could be good anyway. But they may be neglecting to inform the investor that there are other alternatives that an investor could move to without incurring any costs/fees/charges and still remain with the existing firm.

THE TAKEAWAY

If an investor has a good relationship with their broker and trusts them, then they should simply request that the broker provide a detailed explanation of the transfer process and an even more detailed listing of which investor assets will transfer to the new firm without incurring a cost or penalty.

Investors should then focus on discussing any investments that will have to be liquidated at the old firm before moving to the new firm. It may be in the investor’s best interest to have two accounts; one with the old firm and one with the new. The broker may not like this, but it may still be in the investor’s best interest anyway.

If an investor doesn’t have a great relationship with their broker or has not received adequate education and service from them then they may wish to consider simply letting the broker move on and asking for a new broker or request to be serviced by the new firm’s call center.

Changing brokers or brokerage firms may indeed make a great deal of sense in some situations. However, investors should educate themselves about the process, ask the appropriate questions of their brokers, track their own money during the transfer/move and be prepared for requests for additional documents and mistakes along the way.

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